Coal Bed Methane in Asia

Ashley Wright
Partner, Ashurst LLP

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Contents
Introduction to Ashurst Coal bed methane Overview of CBM potential in Asia Regulatory overview - Indonesia - China - India Practical and legal issues Summary Q&A
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Ashurst an international law firm

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Over 1000 lawyers including 220 partners Managing Partner of the Year 2008 - Legal Business Awards Project Finance Law Firm of the Year (Singapore) 2008 - ACQ Finance Magazine Middle East Power Deal of the Year 2008 (Ras Laffan C) - Project Finance Magazine European LNG Deal of the Year 2008 (GATE LNG) - Project Finance Magazine Law Firm of the Year 2007 - The Legal Business Awards Infrastructure Team of the Year 2006 - The Lawyer Awards
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Ashursts global energy practice

Commentators were united in praising this groups energy expertise across the board... Lawyers here possess genuine specialisation in their field." Chambers Global

80 specialist lawyers worldwide dedicated to energy and resources Core teams in Abu Dhabi, Dubai, London, Singapore and Tokyo supported by specialists in other offices Genuine industry experience a number of our lawyers have practiced in-house for global energy companies/key institutions (e.g. Shell, BG, International Power, OFGEM, JBIC, Mitsui) Key strengths in upstream oil and gas, pipelines, LNG, refining, petrochemicals, power, mining, green energy, water, nuclear and CBM
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Coal bed methane

Coal bed methane is an energy resource which is already widely used in North America, where it accounts for about 10% of U.S. natural-gas production. Asias CBM stores, however, have been largely untapped because of logistics, a lack of industrial development and extraction costs. Utilisation of CBM has three major benefits: bridging the global energy shortage; lowering emissions (thereby enabling countries to comply with Kyoto requirements); and improving coal mine safety.

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CBM market trends

change in perception increasingly mainstream convergence in technology pricing market discounts, government incentives, emissions credits increased market share certification of reserves innovations enhanced CBM, CBM to LNG M&A activity Origin, Pure

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Global estimated coal reserves and CBM resources

Country Australia China India Indonesia Russia United States World total Total (million tonnes) 78,500 114,701 92,445 4,968 157,011 242,722 905,147 CBM reserves (TCF estimated) 350 1,000 300 450 700-3,000 700 -

Source: International Energy Annual 2005. U.S. Energy Information Administration (EIA)

By mid-2008, only 15 TCF of CBM had been produced worldwide

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Indonesia
Indonesias potential CBM gas reserves are twice that of its proven and probable natural gas reserves, at an estimated 450 TCF. There are no active CBM recovery projects yet in operation in Indonesia. However - several PSCs have recently been granted Medco, Ephindo, PT Ridlatama Mining Utama, PT Samantaka Mineral Prima, CBM Asia Development Corp with many of the other major energy players expressing interest. Oil and gas infrastructure exists in several coal basins with significant potential - existing extensive pipeline infrastructure in the many major target basins could be used to move produced gas to domestic or export markets.

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China
China is the worlds largest producer and consumer of coal. China currently relies on coal to generate three-quarters of its electricity. In 2006, China produced 1.4 billion cubic meters of CBM, or 3% of the countrys total natural gas consumption. Beijing has recently set an ambitious target to increase CBM output to 10 billion cubic meters annually by 2015. By the end of 2007, China had 2,446 CBM wells, with several CBM mines in the Shanxi, Liaoning and Xinjiang provinces having achieved commercial production. 2 major pipelines planned for CBM transportation. Chinese CBM market dominated by domestic players but increasing foreign involvement. By mid-2006, CUCBM signed contracts for 26 CBM blocks with foreign companies.
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India
Coal is the most important source of energy for electric power generation in India. There is currently only one operational CBM recovery project (a 210 km2 coal field operated by GEEC in the Damodar Valley, West Bengal). Between May 2001 and June 2006, the Indian government offered 26 prospective CBM blocks for exploration. These were won by Reliance Industries, Essar Oil and the ONGC. These 26 prospective CBM blocks cover an area of around 13,590 km2 and are estimated to contain 50 TCF of CBM resources. Expected total production from these blocks is estimated at 1,400 million cubic foot per day at their peak production level.

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Regulatory overview: Indonesia

Key legislation
Law No. 22 of 2001 for Oil and Natural Gas Governmental Regulation No. 35 of 2004 on Upstream Oil and Gas Activities Ministry of Energy and Mineral Resources (MEMR) Regulation No. 35 of 2008 on Procedures for Oil and Gas Blocks Allocation and Offering MEMR Regulation No. 36 of 2008 on Business Undertakings of Coal Bed Methane

Key regulatory authorities

MEMR Badan Pelaksana Kegiatan Usaha Hulu Minyak Dan Gas Bumi (BPMIGAS)
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Regulatory overview: Indonesia contd.

Management of overlapping rights
CBM open areas (no preferential right given) CBM located in oil and gas working areas (preference given to the oil and gas contractor) CBM located in coal mine working areas (preference given to coal miner) CBM located in overlapping areas with both oil and gas as well as coal mine operations (preferential right given to the oil and gas contractor) exploration area cannot exceed 3000 square kilometres for each block development only through a separate special purpose vehicle production sharing contract to be entered into with BPMIGAS as government agency

Other key points

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Regulatory overview: Indonesia contd.

Key commercial terms of CBM PSC
term of the cooperation: typically 30-35 years firm commitment: for the first three years of the exploration phase signature bonus: typically of USD 1 million payable on signature of PSC performance bond: to be equivalent to approximately 15% of the firm commitment or USD 1 million domestic market obligations: around 25% of contractors share of production production bonus on sliding scale depending on production level first tranche petroleum: preferential right to BPMIGAS to take around 10% of the production prior to cost recovery production split: around 45% to contractor right for Government participant to take 10% participating interest

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Regulatory overview: China

Key legislation
Mineral Resources law Coal Law Regulation for Registering to Explore for Mineral Using Block System Regulation for Registering Mine Mineral Resources Regulations For Transferring Exploration Rights And Mining Rights Ministry of Land and Resources Ministry of Commerce China United Coal Bed Methane Company Ltd (CUCBM) CUCBM Monopoly ended in 2007: possible entry of Designated Enterprises (China National Petroleum Corporation and Sinopec in the race)
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Main regulatory bodies

Chief commercial agency

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Regulatory overview: China contd.

Application process setting up of project team by foreign collaborator survey of resources submission to CUCBM/ Designated Company of letter of intention for carrying out cooperative development activities CUCBM/ Designated Company to make application:
to Ministry of Land and Resources for mineral exploration rights; and to Ministry of Commerce for opening-to-outside right CUCBM/ Designated Enterprise and the foreign collaborator to enter into a production sharing contract
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Regulatory overview: China contd.

Key terms of the production sharing contract
exploration risk with the foreign collaborator Chinese party cannot have less than 30% participating interest 2 year tax holiday 5% value added tax applicable after commencement of gas production typically 70% cost recovery is allowed

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Regulatory overview: India

Key legislation:
CBM Policy,1997 Oilfields (Regulation and Development) Act, 1948 Petroleum and Natural Gas Rules, 1959

Key regulatory authorities:

administrative: Ministry of Petroleum and Natural Gas implementing agency: Director General of Hydro Carbons.

Model contract for exploration and production of CBM

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Regulatory overview: India contd.

Key features of the CBM policy
CBM (virgin coal fields) allotment is through bidding open to both foreign and Indian bidders CMM (existing mine fields) preferential rights are given to the coal miners payments to be made
10% royalty payable to the state government additional production linked payment commercial bonus of US$300,000 on declaration of commerciality

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Regulatory overview: India contd.

Fiscal benefits:
no participating interest of the Government no signature bonus 7 year income tax holiday from CBM production date freedom to market in domestic market at market determined prices imported equipment for CBM development exempted from customs duties

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Regulatory overview: India contd.

Key terms of the cooperation agreement
parties to the contract: Government of India and the company four phase plan: exploration; pilot assessment; development and production firm commitment: minimum work program is applicable to the first two phases expenditure obligations: no expenditure obligations gas marketing: free domestic gas marketing performance bonds: bank guarantee equivalent to 35% of the estimated annual expenditure (in the work programme) for the first two phases 100% cost recovery
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Practical and legal issues

CBM compared to conventional natural gas Nature of CBM exploration and operations - different technology and economics - multi-phased development - shallow depths, multiple wells and closer spacing - water production/contamination issues - related infrastructure - calorific values, processing, gas flow - pricing and gas marketing arrangements
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Practical and legal issues contd.

Interface with existing coal mine operations Interface with overlapping conventional oil and gas operations Overlapping/competing interests Land access rights Safety issues Common/shared infrastructure and information

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Practical and legal issues contd.

Terms of production sharing agreements - production splits, cost recovery and taxation - expenditure obligations - domestic market obligations - environmental obligations Terms of joint operating agreements - plans of development - sole risk - technology transfer
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Summary
CBM becoming increasingly mainstream and is welldeveloped in US and Australia, with significant potential in Asia. Indonesia, China and India have each put policies and regulatory frameworks in place for CBM, including fiscal incentives to encourage development and foreign involvement. CBM regulations have been largely based on existing oil and gas regimes, but the nature of CBM projects gives rise to certain practical and legal issues. The way in which these issues are addressed (whether through regulations or by contractual arrangements) impacts on project risk assessment, gas marketing arrangements and market valuations.
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Thank you!
Any questions?

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